Appeasing China on Currency Will Doom Our Economy

September 15, 2010

Congress may be poised to pass legislation to penalize China unless its government plays by agreed-upon rules of international trade and stops manipulating its exchange rate. This currency manipulation, which makes U.S. exports more expensive as they head to China and Chinese imports artificially cheaper in our stores, has helped to inflate dangerous global trade imbalances that have dampened economic growth in the U.S. and around the world.

There is really no disputing the truth that China manipulates its exchange rate, or that this manipulation causes market distortions. It is a set of facts on which a broad base of economists–including staunch free traders like Nobel laureate Paul Krugman–agrees.

So it is extraordinary to see just how fast some multinational companies, Wall Street-oriented politicians in both parties, and a few head-in-the-sand free market economists can jump into bed with Beijing’s communist government and defend its exchange rate manipulation. Remember, China rules through an authoritarian government and practices the antithesis of free market economics. The Chinese engage in a particularly toxic brand of protectionism and mercantilism, one that not only has cost the U.S. millions of good manufacturing jobs, but one that also hurts the efforts of other developing industrial economies to be competitive.

Amazingly, some of these staunch free marketers and conservatives accuse us of “China bashing,” as if it were somehow our fault that China manipulates its currency. That’s like blaming the victim of a crime for being in the wrong place at the wrong time. Put the blame where it belongs: with China, for its action, and with Congress and the Administration, for its inaction.

Anyone who has studied the godfather of free trade, Adam Smith, or President Ronald Reagan’s policies knows that if either of these men were alive today, they would be supporting our efforts to stop China’s currency manipulation, through countervailing measures if necessary.

So, three jeers for the new Neville Chamberlains: those multinational companies, misguided politicians, and ignorant pundits who believe that appeasing the Chinese will bear fruit. The sad fact is that we have tried the Chinese economic appeasement strategy for a decade, and it has failed. Confronting China on currency is not protectionist (because it would serve to restore the free market), does not invite retaliation (because China cannot replace America’s consumer market with domestic consumption), and has historically proven to be effective (as past actions by Nixon, Reagan, and Schumer-Graham to move exchange rates suggest).

Some of the less informed defenders of China’s government may argue that we can’t act because China owns us. The fact is, China is able to buy and accumulate U.S. debt precisely because it wants to maintain a peg to our currency. We do not need or want China to buy our debt–there is plenty of global and domestic demand for that–but China does need to sell its product in our market. That gives us tremendous leverage, if we are willing to use it.

Passing the Schumer-Graham bill in the Senate and Ryan-Murphy bill in the House would be two small steps in the larger effort that will be necessary to stop China’s mercantilism and balance America’s current account.

We need more leadership from the White House and Treasury, which have jawboned China’s government, but have not laid out any consequences. The Administration thought it scored a coup when China announced over the summer that it would allow the Yuan to float a bit more, but since that time, China has showed just how little it is willing to do unless it faces consequences for its cheating.

It would be sad to see the Administration stand firmly with the appeasement crowd on China. Such inaction would put Obama on the wrong side of history, as it represents a victory for the state-run, authoritarian way of doing things over democratic, rules-based capitalism. On Obama’s watch, China may well surpass America as the world’s leading manufacturer next year, a title that America has held for 110 years. Many Americans think we’ve already lost our lead. And millions of American manufacturing workers remain unemployed. I don’t want that to be a legacy of this presidency, and I doubt if any American does.

We cannot allow the Chinese to have their wish fulfilled: to make our demands for change disappear. Congress should pass strong legislation to level the playing field for America’s workers and businesses. And they should do it now.

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